Fab Tool Market Expected to Contract Again

SAN FRANCISCO — The market for semiconductor manufacturing equipment is set to contract for a second straight year in 2013 but rebound strongly in 2014, according to the fab tool trade group SEMI.

SEMI, in San Jose, Calif., says it now expects total semiconductor equipment sales to fall to about $36.3 billion this year, down about 2 percent from 2012. Last year, semiconductor equipment spending declined by about 12 percent compared with 2011.

But SEMI expects a strong rebound in fab tool spending next year following two consecutive quarters of conservative investment by chipmakers. The trade group projects that total equipment spending will rise 21 percent in 2014, reaching nearly $44 billion. If so, it would be the second biggest spending year ever for semiconductor capital equipment, trailing only the record $47.7 billion spent in 2000.

SEMI's latest 2013 forecast, issued at a press event here on the eve of the industry's annual Semicon West tradeshow, represents a decline from a previous SEMI forecast, which called for total equipment spending to be about $37.4 billion.

Speaking at a press event on Monday, Dan Tracy, senior director of industry research and statistics at SEMI, said a slowly improving global economic outlook was beginning to move the needle in the right direction for the semiconductor and semiconductor equipment industries. "This year, things are moving forward," Tracy said.

Dan Tracy, senior director of industry research and statistics, speaks at the Semicon West press conference Monday.

Citing data compiled by the World Semiconductor Trade Statistics Service, Tracy said the semiconductor industry is set to grow by a single-digit percentage each year through 2016. Tracy also said that SEMI's book-to-bill ratio -- the ratio of bookings to billings for semiconductor equipment suppliers based in North America -- has been growing steadily since last November.

As has been the case every year since 2011, SEMI expects semiconductor equipment spending to be driven largely by foundry spending in both 2013 and 2014. The trade group expects tool spending by foundry customers to exceed $16 billion this year and exceed $18 billion next year.

Excellent points, NAND! The equipment maker market IS a complex mosaic, and the global economy is all of that to the 100th power. The financial markets, as you surely know as an analyst, have many forward-looking indicators, yet even among the most sophisticated market-watchers, there is a broad split between winners and losers every day. Still, it's addictive, isn't it, to see shifts in orders and consider their impact on the larger world around us. A butterfly flaps its wings in Beijing and a tornado roars through the US mainland -- is there a way to compute that relationship? Perhaps the semi eqpt makers predictive theory belongs on that level, or maybe it says something about the health of the larger tech economy.

Except AMAT and LRCX--two of the most important semi-equipment firms in the country--have both just been bullish in their SemiCon analyst meetings. And I would dispute your alleged cause of orders dropping--it might well happen because of where in the cycle semiconductor vendors are. When they add wafer capacity, it is often too much to digest at once, so there is a glut for awhile and orders to the equipment companies dry up. That doesn't necessarily mean that the general economy is slowing down (although of course it might mean that).

Plus right now there are so few customers for the equipment companies. Consolidation has taken its toll, and oligopolies now exist in NAND, DRAM and foundries. Lots of factors to take into account.

Dylan: It's not. That was the 90s. But semiconductor equipment suppliers are. Think about it: If orders drop, it's because the chipmakers don't see a need to ramp up. If they don't, it's because they see slowing demand, because computer makers will be selling fewer computers, because businesses have delayed orders, because the economy is slowing down. I think the theory still holds water. And, btw, there are reports Apple is cutting production orders, the Chinese see slower economic growth, and the German economy is not so wunderbar anymore.

In the 90s, one of the more reliable future-looking economic indicators was the quarterly forecast for Applied Materials. In the 50s, people said "As GM goes, so goes the country," but by the 90s it was AMAT's outlook. I hope things have changed. I'd hate to think a contraction in semi eqpt makers portends another recession.

I think a lot of signs point to a bounce back year for equipment spending. They could really use it, and chip makers are going to have to buy more gear to continue scaling. I am expecting cautious optimism.

Having read about AMAT's Analyst Day meeting and having just heard Lam talk, they sound more bullish to me than this report does. Of course, part of the job description of a CEO is to sound bullish. But still, as Lam pointed out, there has been a lot of consolidation in the industry over the past few years, meaning that strong survivors can make good money even in a market that isn't as robust as it used to be.

So far, too early too tell what the vibe is like at the show. In recent years it has been pretty subdued, but I haven't spent as much time on the show floor as I used to.

I'm sure many people are enthused by SEMI's optimistic forecast for 2014. I know we all hope it is on target. The equipment industry would dearly love a boom year. But SEMI's forecast (contraction this year, double digit growth next year) sounded familiar to me so I checked. Sure enough, it's similar to the forecast SEMI issued last year at this time. At that time the group was calling for a 10 percent increase in equipment spending in 2013. Obviously that is not coming to pass, so everyone is hoping for a big year next year.